JPMorgan Chase's Dimon lists global systemic importance approach as his top regulatory concern

9 April 2019 7:13pm

8 April 2019. By Neil Roland.

Jamie Dimon, JPMorgan Chase's chief executive, said his biggest regulatory concern is that the international method for calculating global banks’ systemic importance lacks empirical basis and needs updating.

This flaw, Dimon said in his annual letter to shareholders last week, could infect US Federal Reserve stress tests because they would include the international approach under a pending proposal.

Without recalibration of post-crisis systemic risk requirements, he said, “certain products and services will continue to be pushed outside the banking system,” where they lack regulatory oversight.

Dimon focused on the Basel Committee on Banking Supervision methodology used in determining whether firms qualify as global systemically important banks, or GSIBs, and in specifying their capital requirements.

“Most of the factors used in GSIB requirements are not risk-adjusted – and many of the calculations have no fundamental underpinning or logical justification,” his letter said.

— 'Substitutability' —

Dimon expressed particular displeasure with one of the five risks used in this methodology: the lack of readily available substitutes for a bank’s services in a crisis.

This factor, known as “substitutability,” considers market share of equity and debt underwriting, he said — without taking into account that no bank had a problem replacing these activities after Lehman Brothers’ 2008 collapse.

The four other factors in the Basel methodology are the size of a bank, its interconnectedness, its global activity and its complexity.

Dimon said his concerns are amplified by the inclusion of this approach in a pending Fed proposal for stress tests, also known as Comprehensive Capital Analysis and Review tests.

“My biggest issue is with GSIB capital requirements, and since they may be added to the CCAR stress test, they become even more important,” the head of the largest US bank said.

— Fed proposal —

Last April, the Fed proposed aligning firms’ capital standards with their stress test results.

The stress-test regime would be streamlined in ways to give relief to smaller lenders while slightly increasing capital requirements for some of the largest banks.

Under the Fed proposal, requirements for banks not considered systemically important would decline between $10 billion and $45 billion.

For the eight largest banks, including JPMorgan, the proposal would “generally maintain or somewhat increase” capital requirements between $10 billion and $50 billion based on past performance.

A key regulator for Dimon to persuade is the Fed’s vice chairman of supervision, Randal Quarles.

Quarles, who doubles as head of the Financial Stability Board, has said that a key priority for the Switzerland-based authority is to assess how efficiently post-crisis rules are being implemented.

Fintech Regulation in 2018